As the popularity of equity release has increased among older generations looking to free up cash from their property wealth, equity release providers have developed a range of different types of plans and features to choose from.
Choosing the right types of product will depend entirely on how much money you are looking to take out of your property, whether you are making small household repairs, passing on an early inheritance gift, or funding long-term care.
Dean Mirfin of the equity release specialist Key Retirement said that “speaking to a specialist financial adviser will help customers to decide what product is right for them and which product features suit their lifestyle”.
If you are seeking advice, it is worth going to a professional that is a member of the Equity Release Council. The council protects consumers from getting the wrong advice and forces its members to adhere to a strict set of rules and regulations.
To help you navigate this sometimes-confusing world, here is a quick guide to the different types of equity release.
Different types of equity release
- Lifetime mortgage
This is one of the most popular types of equity release, which involves borrowing a sum of money against the value of your home. Unlike a conventional mortgage, you do not have to make repayments.
Instead, interest is added onto the value of the loan each year until the property is sold or the owner dies.
It is worth noting that a lifetime mortgage can reduce the amount of inheritance you will be able to pass on to your family.
- Lump Sum
This is where a borrower agrees on the loan amount and takes it up front and in full. This type of equity release is normally used for larger expenditures such as paying off your mortgage.
This is where a borrower agrees to take out a loan and receive it in regular tranches. You only pay interest on the amount that has already been drawn down. As a result, interest rolls up more slowly than with other types of equity release.
- Reversion Plan
This is another popular equity release product and can be used to fund or supplement your retirement.
With a home reversion plan, you sell part or sometimes all of your property to a lender. For argument’s sake, you may sell 25pc of your property.
If you sell a quarter of your property through a reversion plan, you will be paid a discounted price, relative to what you would get by selling the property normally. You can then use the money to pay off your mortgage or fund your later years, staying in your home until you sell or die.
At this point, your property is sold, and the lender takes its cut of the sale proceeds. There is no interest to pay on this plan as the lender owns a share of your home as soon as the plan is agreed.
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EQUITY RELEASE MAY REQUIRE A LIFETIME MORTGAGE OR HOME REVERSION PLAN. TO UNDERSTAND THE FEATURES AND RISKS, ASK FOR A PERSONALISED ILLUSTRATION.